Diversification: The African Entrepreneurial Way

Entrepreneurs in Africa are widening their business interests more than in any other part of the developing world, creating businesses across various different sectors. This has been attributed by some to the wealth of opportunity that exists on the continent, with business people not willing to restrict themselves to one sector alone.

The Ghana-based IMANI think tank found in a study of 189 successful African entrepreneurs that African entrepreneurs in Ghana, Kenya and Nigeria own an average of six businesses each, with one busy businessman owning more than sixty. Some entrepreneurs have attributed this to the extraordinary opportunities the continent boasts, and a serious desire for expansion out of a particular sector. Other companies feel the need to start new businesses to complement existing ones, while a lack of key resources and an unreliable bureaucracy seems to discourage entrepreneurs from putting all their eggs in one basket.

Cyril Allen II, whose family farm cocoa and coffee in Liberia, says the opportunities available to entrepreneurs on the continent make it impossible to resist diversifying into other sectors. He himself has branched out into property, running a cleaning business and managing logistics for international companies. In spite of the Liberian civil war ending less than a decade ago, he sees no reason why businessmen should not take advantage of opportunities across the board. There appears to be a sense that if African entrepreneurs can succeed in one sector then there is no reason not to diversify. “We work based on relationships, so if I have a good relationship with a client, they might ask for another service,” says Njeri Rionge, an entrepreneur in Kenya whose interests extend from an internet provider to a management consultancy. Other entrepreneurs expand to boost their original businesses. Ghanaian Prince Kofi Amoabeng started loan company UT Holdings in 1997 but soon needed to offer additional services to make it work. “We found existing firms wanting,” he said.

The unusual African trait for extreme diversification may also be due to certain peculiarities of African economies and bureaucracies. Given the lack of managers capable of running large companies, many entrepreneurs choose to run several small businesses rather than large ones, to fit with the mid-level managers’ skills base. There are also problems with financing, as it is often easier to get small loans for small business rather than big cash inputs for a large firm. And African bureaucracy looms large. Regulation is so unpredictable that businessmen prefer to spread their resources across the board to limit the damage in the event that their market becomes a target for strong regulation. In the same way, separate companies can be used to lower tax dues.

This diversification has had its critics, who argue that businesses suffer if entrepreneurs are spreading themselves too thin, while investors are often dissuaded from becoming involved due to complex ownership structures. Yet African entrepreneurs themselves defend the trend towards multiple business ownership. “It makes African business leaders agile and adaptable—both good skills that are absent in many developed economies,” says Rioge. Bright Simons, an entrepreneur in Accra who also works as a business analyst, also defends what he calls “hyper-entrepreneurship” and “excess diversification”. He was involved in the IMANI study.

“The more we probed the more obvious it became that the “excess” diversification was rational when viewed at the right level,” Simons wrote in a guest blog for Ventures Africa. “These multiple, single-owner businesses played the role of tax vehicles, supply chain harmonisers, training grounds for mid-level managers, collateral shells (in the fragmented credit system), several other functions that in the West are achieved through different, not necessarily superior, means — including the hiring of expensive tax accountants, lawyers and consultants.”

“In a sense, African entrepreneurs run profit ecosystems rather than business units. These ecosystems interact with other ecosystems in a culturally elaborate manner that can produce extreme robustness, resilience, and flexibility.”